(PUB) Investing 2015

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4 • Fund Family Shareholder Association
INTERVIEW > CHARLES PLOWDEN
Finding Growth Here, and Overseas
AT JUST 54, Charles Plowden, chief of investments and
one of two senior partners at Baillie Gifford, is barely
half as old as his firm, which got its start in Edinburgh
in 1908 and was first hired by Vanguard in 2003 to run
a portion of International Growth. In 2008, the firm
also took over portions of Global Equity and Growth
Equity(which was merged into U.S. Growth , of which
they still run a portion). Plowden and two of his partners run one-third
of Global Equity’s assets to mimic Baillie Gifford’s Global Alpha strategy,
which has consistently outperformed Global Equity as a whole. Jeff and I
discussed all of this and more with Charles last month.
Charles, can you explain Baillie Gifford’s perspective on growth
investing?
When we think of growth, we really are talking about above-average
growth. We are only interested in companies if they have the potential
to grow at double-digit rates over the long term. The long-term global
average is 7% or 8% nominal earnings growth. And so we are looking
for, let’s call it the top quartile of that, so 10% plus. We see different
growth styles.
A “growth stalwart” is very steady, predictable growth, but pretty
much close to 10%. So that’s a Pepsi or Coca-Cola, tobacco companies
and Colgate-Palmolive. There’s the high degree of certainty year to year
about their performance that risk-averse investors like. Typically they are
cash generative, and they do pay dividends, though they don’t have to.
That sort of growth can be above average, but tends to fall in and out of
fashion in terms of stock markets. At the moment, we see that sort of
reliable stock as pretty pricey.
The next category are “classic growth” stocks—the rapid growth
stocks whose top lines are growing rapidly—often where demand is
very strong. The big U.S. examples would be Facebook, Amazon, Google.
These are companies that are capable of 15% to 25% per annum sus-
tained growth rates. Again, with those companies, they go in and out of
fashion, and they typically trade for high multiples.
VANGUARD LAUNCHED its newest
actively managed bond fund, Ultra-
Short-Term Bond, on February 10,
and after a short subscription peri-
od, started investing client money on
February 23. We’ve gotten a bunch of
questions asking where the fund fits
into a financial plan, and, more to the
point, whether it is a money market
alternative or not. Some confusion is
understandable, as even Vanguard has
gone back and forth on that.
Vanguard’s initial informational
article announcing the planned launch
led off saying that investors who’d like
to “earn a better return than the near-
zero yield of a money market fund
without losing the ability to access
[their] money” as with a certificate of
deposit, should consider Ultra-Short-
Term Bond. Sounds like a case for a
money fund substitute.
Vanguard has since backed away
from that, saying that since its price
can and will fluctuate, the fund is not
a money fund alternative; rather, inves-
tors who are looking to “diversify the
duration within the bond portion of
[their] portfolio” may want to look at
the fund. Got that?
Let’s be honest, investors aren’t
thinking about diversifying duration—
they are looking at this fund as a money
market sub, as they do with Short-Term
Tax-Exempt. Unequivocally, if you
need a dollar-in, dollar-out guarantee
and can’t make up any shortfall in your
balance, then a money market fund is
the way to go. But if you don’t need the
money today or tomorrow, or can toler-
ate small changes in price, then Ultra-
Short-Term Bond could provide a little
more income for your rainy-day funds.
There isn’t yield or portfolio data
available yet, but according to its pro-
spectus, Ultra-Short-Term Bond will
look to maintain a weighted maturity
of 0 to 2 years (it was 1 year at month-
end). The portfolio will hold at least
65% of assets in bonds rated A or better.
The new fund is benchmarked against
the Barclays US Treasury Bellwether
1-Year Index, which includes the most
recently issued U.S. Treasury bill with a
1-year maturity. Though safety is going
to be the name of the game, I expect
managers Gregory Nassour and David
Van Ommeren will invest beyond the
Treasury market, particularly among
corporate bonds.
Ultra-Short-Term Bond’s Investor
shares (VUBFX) charge 0.20% in
expenses and require a minimum ini-
tial investment of $3,000, while the
Admiral shares (VUSFX) charge 0.12%
and require a minimum of $50,000.
Ultra-Short-Term Bond is not a
money market fund, as Vanguard even-
tually made clear. But risk should be
low, and investors who can handle
small changes in NAV may indeed find
this fund a good alternative to a money
market fund, providing more yield and
greater returns over time. However,
like money funds, which I see more as
money management tools than long-
term investments, Ultra-Short-Term
Bond shouldn’t play a main role in
your long-term, diversified portfolio. It
could well serve as almost-dry powder,
but for your longer-term money, Short-
Term Investment-Grade will serve
the role of a portfolio shock absorber
with greater returns over time. n
CASH PLUS
Ultra-Short Is Live